The SEC has come under fire lately for its use – some might say overuse – of internal administrative proceedings. The SEC’s use of administrative proceedings and administrative law judges (ALJs) is by no means unique within the federal government. Thirty‐four agencies currently have ALJs. Nor is the SEC the heaviest user of administrative proceedings or ALJs; the Social Security Administration has that distinction, with more than 1,300 ALJs according to the most recent data available. The SEC, by comparison, has only five ALJ positions, two of which are recent additions.
The SEC’s ALJs have been in the spotlight due to a provision in Dodd‐Frank that expands their ability to impose fines. In the past, the SEC could impose monetary sanctions only on individuals and entities registered with the Commission – typically brokers, investment advisors, and similar entities and their employees. By registering with the SEC, it was reasoned, these individuals and organizations had submitted to the SEC’s jurisdiction. Others could be brought before the SEC’s tribunals for violating federal securities laws, and the ALJs could make findings of fact (that is, decide which side’s version of the facts was correct) and issue cease and desist orders, but could not impose fines. Instead, the SEC’s lawyers would have to bring a separate case in federal district court. Under Dodd‐Frank, registered and unregistered persons are treated the same.
Administrative proceedings have their advantages. Like a federal judge, an ALJ can issue subpoenas, hold hearings, and decide cases. Because an ALJ’s cases deal with a very narrow area of law – only that related directly to the ALJ’s agency – the ALJ’s knowledge of that area tends to be deeper than that of a federal judge who hears a broad range of civil and criminal cases. The proceedings before ALJs tend to be somewhat truncated, with fewer procedural requirements than federal district court, allowing the case to be decided more quickly.
While administrative proceedings have some advantages, there are also disadvantages, especially for defendants. There are no juries, which raises questions about the constitutional right to a trial by jury, especially if ALJs impose quasi‐criminal sanctions such as imposing fines. (There are, more generally, also constitutional questions about whether there is appropriate separation of powers between the judicial and executive function in agency hearings, and whether the current method of selecting ALJs violates the appointments clause.) The speed with which administrative proceedings move can also disadvantage a defendant; by the time the SEC has filed charges, it has already prepared its case, leaving the defendant to play catch‐up. In addition, because the discovery process in administrative proceedings is limited, defendants’ ability to obtain exculpatory documents from the SEC is also limited. Finally, although ALJs are expected to remain neutral in fulfilling their duties, they are a part of the agency whose case they are hearing. Justice demands not only actual impartiality from the court, but the appearance of impartiality as well. As an agency’s ALJs approach a win rate of 100 percent, the appearance of impartiality fades.
Almost certainly in response to the recent criticism, this past Friday the SEC released guidance on how its enforcement division chooses whether to pursue a case in federal district court or before an ALJ. The guidance is vague. In general, the SEC tells us:
There is no rigid formula dictating the choice of forum. The Division considers a number of factors when evaluating the choice of forum and its recommendation depends on the specific facts and circumstances of the case. Not all factors will apply in every case and, in any particular case, some factors may deserve more weight than others, or more weight than they might in another case. Indeed, in some circumstances, a single factor may be sufficiently important to lead to a decision to recommend a particular forum.
These factors include: (1) the availability of the desired claims, legal theories, and forms of relief in each forum; (2) whether any charged party is a registered entity or an individual associated with a registered entity; (3) the cost‐, resource‐, and time‐effectiveness of litigation in each forum; and (4) fair, consistent, and effective resolution of securities law issues and matters. Absent from the guidance is the recognition that it is the “availability of the…claims, legal theories, and forms of relief” that the SEC desires that factors into the determination.
This “guidance” is troubling. The fact that it is unlikely to be unique among federal agencies is also troubling. The agency should not be able to choose to bring the case in the venue where it’s more likely to win (i.e., because it can use “desired…legal theories”). It should not be able to choose a venue because certain “forms of relief” (i.e., punishments) are unavailable in the other venue. To be sure, such “forum shopping” happens even outside of administrative proceedings. A criminal case may be brought in federal court instead of state court because prosecutors believe they are more likely to prevail in federal court. But such concurrent jurisdiction between state and federal court pits two sovereigns – the state and the federal government – against one another, creating certain checks on each other’s power. In the case of an agency’s attorneys choosing an ALJ over a federal district court, you have simply increased the ways in which the government can win.
